Date: May 10, 1995

To: Wendy Comes

From: Judy Yuran

Subject: Issues Resolution Committee Comments on PP&E ED 

Thank you for attending the Issues Resolution Committee (IRC)

meeting on February 9th and the Property Plant & Equipment (PP&E)

Subcommittee meeting on March 23rd. The following are comments

from IRC members related to the FASAB PP&E Exposure Draft (ED). 

Holden Hogue plans to officially submit these comments with a

letter to Mr. Young. 

GENERAL COMMENTS

Capitalization versus Expensing

 ! Title II states that when assets that don't meet

capitalization thresholds, individually, are purchased

in lots or as combined components meeting the threshold

collectively, they are capitalized. Since Title II

will be superseded by the Standards, the PP&E Standard

should provide guidance in this area.

Example I: Individual components (hard drives, output ports,

communications etc.,) used to construct a computer may not

meet the capitalization threshold individually or even when

combined. When an additional component is added (memory

board) or an improvement is made it may then meet the

criteria. If the purchase of the individual components was

originally expensed, should the expense be reversed and the

total asset then be capitalized?

Example II: A purchase of a single desk may not meet the

capitalization threshold, whereas, the purchase of many

desks may. Should these desks be considered for

capitalization individually or in aggregate? 

 ! Mission PP&E is to be expensed. If the asset is

brought into general use and reclassified, should the

original expense be reversed and the asset capitalized? 

If so, at what value should the asset be recorded,

original cost, fair market, or original cost

retroactively depreciated?
2

Government-owned versus Non-Government-owned Assets

 ! When Government-owned, contractor operated equipment is

purchased by a contractor under a government service

contract the equipment is expensed under OMB Object

Class 25, Other Contractual Services, and not recorded

as a capital asset. Should this be classified as a

capital asset? If so, how can this be accomplished?

 ! How should Government-owned equipment donated or loaned

to non-Federal entities and foreign governments be

classified?

GENERAL PP & E

Page 3, Para 12 

IRC Comment: The Board should establish capitalization

thresholds and a method to review these thresholds at specified

intervals. If left to the Federal entities there will be wide

differences on what is expensed at acquisition and what is

expensed through depreciation. This will affect the accumulation

of cost data, the recovery of costs through reimbursable

agreements and the ability to make comparisons of costs across

the agencies. This will become more critical as performance

measures are used to determine which programs retain their

funding and which programs are cut. Finally, there is a concern

about the auditability of the U. S. Consolidated Financial

Statement if capitalization criteria is inconsistent among the

agencies. 

FEDERAL MISSION PP&E

Pages 29 and 30, para 98 - 101

IRC Comment: The definition of Federal Mission PP&E is too

ambiguous and difficult to apply. Does it mean "end-product," or

would it include the related support costs and/or work in

progress? Also, instances of equipment being converted from

mission specific to general use occurs more than the standard

addresses. There is a possibility of reclassification of

property to alternate future use. The standard doesn't address

how to reclassify from one type of property, plant and equipment

to another or whether prior period adjustments might be necessary

to properly account for the reclassification.
3

Page 31, para 106

IRC Comment: There appears to be a conflict between Property,

Plant and Equipment and the Inventory Standard (page 33, para

136) concerning treatment of military equipment (specific-use)

versus stockpile materials. PP&E indicates Federal Mission

equipment be expensed, whereas the Inventory Standard treats

stockpile materials of any kind as inventory. Shouldn't all

mission related assets whether related to PP&E or Inventory

should be treated the same?

DEFERRED MAINTENANCE

Page 21, Question VI

IRC Comment: Deferred maintenance should not be recognized as a

line item liability (without amount) or as a note. The deferred

maintenance cost concept and approach is not reasonable and would

be too costly. The methodology for determining cost, such as

current replacement value is not clear or specific enough. There

are no transactions or events which lead to the creation of a

liability. Data is not sufficiently measurable or recognizable

for establishing a liability. A similar argument can also be

made for not including information as a note. Notes which are an

integral part of the financial statements should not be

incorporated if they contain data that is not measurable or

recognizable.

 

CLEANUP COSTS

Page 21, Question VII - A

IRC Comment: The liability accounting treatment for cleanup costs

should be the same for General PP&E as for Federal Mission PP&E.

The full cleanup cost should be recognized as a liability at the

time the General PP&E asset is put into service. A contra

account should be established to recognize a deferred charge

which would be amortized over the appropriate accounting periods. 

There is no need for a General PP&E disclosure note.

We appreciate the opportunity to comment on this exposure draft. 

You may call me on (202)874-6308, If you have any questions.